Why palm oil must sell at a big discount to fossil diesel

Fluctuations in agricultural commodity prices could be pretty rapid over short time spans. This has now happened with crude palm oil (CPO), of which India is the world’s largest importer and Indonesia and Malaysia, in that order, dominant producers. Early November, Godrej International Director Dorab Mistry, in the habit of risking his reputation by making price forecasts, said at a China international oils conference that CPO, to remain attractive, “should be allowed to fall to a level of ringitt 2,200 ($719.66) on Bursa Malaysia Derivative Exchange (BMDE).” At that point, CPO futures were done between ringgit 2,500 and 2,600. His thesis was unless there was significant climbing down in CPO prices from this high perch, it would be impossible for Malaysia to “export its customary three million tonnes” of oil in 2013, particularly if an export tax at 5.5 per cent were to be paid in the New Year. But can Malaysia, likely to have finished 2012 with CPO production of 18.6 mt to 19 mt, afford not to be an exporter? Mistry’s answer is a resounding “no”.

Malaysia might be thinking that any loss in CPO exports is to be made good by selling larger volumes of refined, bleached and deodorised (RBD) palmolein to China, the world’s biggest market for it. But China, which as part of food safety campaign, in response to innumerable complaints from consumers and criticism abroad, is to introduce highly demanding specifications for RBD palmolein starting New Year is more than likely to derail the Malaysian plan. Mistry suspects China, like India, will emerge as a big importer of CPO and then do the refining locally. His other argument is if a situation arises where CPO quotes as little as $50 a tonne less than fossil diesel, then that will leave palm oil-based fuel with no hope of any takers. Such considerations besides, the prospect of 2013 opening with very comfortable stocks, steadily brought CPO prices to a level that Mistry thinks will keep this oil enjoying favour of importing nations. No wonder, industry officials see an oracle in Mistry. However, forecast of heavy rains and floods in Malaysia is once again lifting CPO prices.

At what rates palm oil trades on BMDE are of significance for us since in our oils import basket, CPO and RBD palmolein have a preponderant presence. In the oil year ended in October 2012, out of our total imports of nearly 9.982 mt, CPO constituted about six mt and RBD palmolein 1.58 mt. Incidentally, as our edible oils import dependence has risen to about 60 per cent to take care of the shortfall in domestic supply, we are also using fairly large quantities of foreign-origin sunflower and soybean oils. Oil imports fall in November, the first month of the 2012-13 oil year, by 18.12 per cent to 700,371 tonnes, is no cause for rejoicing. The question to be asked is, has the fall got anything to do with the highest in three-year CPO imports of 768,336 tonnes in October? The common knowledge is Malaysian and Indonesian CPO exports slacken with the advent of winter, when the oil starts solidifying.

Solvent Extractors Association Executive Director B V Mehta says large port stocks, a good volume in the pipeline and importers’ wariness of getting waylaid by currency fluctuations were among principal reasons for the import slowdown in November. In fact, in keeping with the Indian seasonal oils import pattern, port arrivals in December and also in January are not to show any significant change. Is this also not the time of year for processing of harvested kharif oilseeds like soybean? At the end of this oil year, however, we are likely to see, as Mehta says, “our oils imports rising by as much as half a million tonnes”. Helped by rising per capita income and change in food habits, the Indian demand for vegetable oils is rising five per cent a year. What, however, remains a point of concern is that in a situation of land availability under oilseeds hovering between 26 m and 27.5 m hectares with irrigation coverage of only around eight m hectares and productivity more or less stuck at 955 kg a hectare, the country’s import dependence on oils cannot but rise. Productivity, however, fell to 887 kg a hectare in 2011-12 season due to unfavourable weather. Indian oilseeds productivity is less than half the world average. Some countries grow well over three times the crop in a land unit than is the case here. Coming closer to the world average will require of us to correct any flaws in our agricultural practices, significantly expand the command irrigation area under oilseeds and offer prices to farmers adequately compensating them for their efforts.

In the meantime, Indian importers have taken note of Germany’s Hamburg-based research and analyst house Oil World saying global palm oil prices stand a chance of appreciation early next year as competitive palm prices vis-a-vis most other edible oils, including soy and rapeseed oils, could stimulate smart export demand for CPO. Oil World says, “We expect palm oil prices to appreciate in the next three months owing to pick up in export demand, seasonally declining production and resulting reduction in stocks.”